An Investing Parable

Mr. Market is a parable created by Benjamin Graham, often considered the “Father of Value Investing”. Mr. Market, you see, is a fictional character that offers to trade his stocks every day and at different prices. Mr. Market is an emotional and at times delusional person. He often lets the good times take his pricing too high and also lets a down market take his pricing well below intrinsic value. Below we are going to catch up with Mr. Market and see how the last 25 years have treated him.

As I arrive for the interview, the market is again falling and Mr. Market is in a nasty mood. Try as I might it takes a good while to settle down and look at the big picture. Mr. Market has a propensity to watch stock quotes and headlines with voracity. When we finally sit down, I ask him a simple question, “How is it going?” He tells me he really likes the businesses he owns but the news and direction of the market are giving him fits. “I really believe it is different this time” he says. I ask him to explain further. His reply is typical, “I am starting to think this market might crash from here and that I should take my money and run NOW!”

I ask him if this isn’t the same mistake he made 25 years ago. “It is different this time” he replies. We both agree the current market looks a lot like it did 25 years ago. Back in mid-1990, the market had spent the previous two years climbing higher but between July and October of 1990 the market falls more than 17%. Towards the bottom, the re-unification of East and West Germany is all over the headlines. Mr. Market had thought that might be a good thing for the markets but as the market has been “killed” the last three months, it is clear this German news is actually very bad news for the markets. Iran Contra is also all over the newspaper, clearly that must be bad news for the markets as well. Iraq invades Kuwait, Margaret Thatcher resigns and in short Mr. Market has had it. He remembers thinking “With everything in the world working against us, clearly it is different this time”. And with that he sells out and goes to cash pretty close to the autumn 1990 lows.

“Yeah but I made a lot of money over the next 25 years” he says. And indeed he did. Cashing out in 1990 with nearly a million dollars to his name, that million has now grown to $2.6 million. “Pretty good huh?” he asks. “Certainly is” I reply, after all who wouldn’t want an extra $1.6M?

I then remind him that just like autumn of 1990, people today in 2015 have again taken a record amount of money out of stocks and put those funds into cash earning zero. “Smart people” he replies. So I ask him about his underperformance over the last 25 years. “Underperformance? You just told me you agreed an extra $1.6M is a good thing.” I again agree it is. He then offers up he did some “buying and selling” in the dot.com blow-up. He also avoided some of the downturn in ’08-09 by selling out and then getting back in. “And here I am today with $2.6M”.

My turn. “Yes but Mr. Market if you had simply held through 1990, 2000-2001, 2008-2009 and believed that your quality businesses would pay their dividends, you would reinvest those dividends and eventually come through stronger on the other side, you would have seen a more than 900% increase… Mr. Market, your million dollars from 1990 would now be worth more than $9M and generating north of $250,000/year in dividends!” He looks perplexed. “That is the math Mr. Market, the market with reinvested dividends ran more than 900% over the last 25 years and you personally made only a fraction of that”. At this point he is ticked off and without a lot left to say, he starts wrapping up the interview.

I go for one last question. “Mr. Market, given what I just told you along with the fact we are seeing investors flee stocks for cash in amounts we have not seen since 1990 and furthermore worldly events have dropped the markets 12% in less than 2 months, what are you going to do now?”

Mr. Market takes a deep breath and says “I am already doing it, I am selling, and it is different this time”.

I leave fully understanding Mr. Market’s actions. I know it feels good to sell out when things look bad. Sadly, I also know he will miss out on longer-term returns as he always has. He never learns, hopefully we do.